Revenue: Contribution, Exchange or Both?
Nonprofits should be aware of a new accounting standard: ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
It concerns revenue obtained from exchange transactions while contributions can still be reported under existing rules. Revenue that combines an exchange and a contribution in one transaction will require bifurcation, or separation.
The distinction turns on the values exchanged, if any. In an exchange transaction, both parties receive something of value. In return for a tuition payment, for example, a non-profit school delivers academic instruction. Such revenue is governed by the new standard.
But in a contribution, one party donates freely without expectation of any benefit in return. A no-strings bequest to the same nonprofit school is a contribution and is not covered by Topic 606.
Nonprofits will need to review their sources of revenue to decide what portion falls under the new standard. Here are some of the most common types:
Donations. When a donor writes a check to a nonprofit with no or minimal benefit, in return, it counts as a contribution.
In-kind contributions. A donor’s gift of goods or professional services, if the donor derives no benefit, counts as a contribution.
Event sponsorships. An event sponsor may receive wide recognition and favorable light on their brand, but those are considered of only nominal value, and the sponsorship is a contribution if it is not considered advertising. The value of tickets to the event itself is not normally deductible.
Admission to events. A $20 ticket to a Little League fish fry is an exchange, but a $200-a-plate awards ceremony probably includes both an exchange transaction (cash for dinner) and a larger contribution.
Dues. If dues payers receive a quarterly newsletter and a ballpoint pen, which is considered minimal, that’s a contribution. But admission to three performances a season may constitute an exchange.
Government grants. A grant to an organization to provide a public service is a contribution. But a grant for services provided to a government agency may be considered an exchange transaction.
Program fees. Fees for education, counseling, or other services are exchange transactions.
For most nonprofits that don’t issue bonds, the new standard takes effect in reporting periods beginning after December 15, 2018.
Our nonprofit team would be happy to discuss this new standard with you further. If you have any questions on how it may affect your organization, please call us at 512.610.7200.